Deciding to sell a business is a difficult choice, but the reasons that can lead to the sale of the business are many, and arriving prepared for this moment is, therefore, crucial.
Coming prepared means knowing when is the right time to sell a business and how to sell a business. It means, in more practical terms, knowing how to calculate the value of the business, who to turn to in order to sell the business, finding the right buyer and negotiating with him or her to reach a good deal, so that you can handle the post-sale process with peace of mind as well. In this guide you will find all this (and many other tips for selling your business efficiently and profitably).
Why sell your business?
There is a fundamental question you need to ask yourself before trying to figure out how you can successfully complete the sale of your business: why should you sell it? The reasons, as already pointed out, can be many.
One of the most recurrent reasons refers to the personal sphere: in this case the reasons range from more or less sudden health problems to retirement and the lack of a generational transition, passing through family obligations. The need to change and identify new perspectives and business opportunities also pertains to this sphere.
Selling the business is also one of the possible responses to market uncertainties and its risks: by selling the business, in fact, as an entrepreneur you can get rid of any burdens that have become too heavy. In this regard, however, never forget the wise words of Warren Buffett:
“The decision to sell your business should never be dictated by the market, but by your vision for the future.”
There is another frequent reason among those that can lead to the sale of a business: it is the need to generate liquidity. Sale, in fact, gives the opportunity to convert business assets into cash relatively quickly.
As far as a startup is concerned, there is then an additional aspect to consider: selling is one of several paths that you can take at the time of the so-called exit strategy, the last step in the financial planning cycle of a startup. Should you find yourself at this stage, you may, for example, decide to sell your startup (now self-sustaining and ready to expand) to a larger company.
The importance of providing the reasons that led to the divestment
Did you read the previous paragraph very carefully? You need to know that the sale of your business will depend in large part on your ability to explain the reasons that led you to make this decision.
Some reasons (such as, for example, approaching retirement) are obviously easier to communicate. Others, however, require more shrewdness: on the financial side, for example, it is essential that you be absolutely honest and transparent with prospective buyers.
Keep in mind in this regard that an agent or intermediary can help you best communicate with those interested in buying your business. We will elaborate on this aspect later.
When is the right time to sell?
Knowing why you need to sell your business is also important for another reason: it also helps you understand the right time to do so. The “right time,” in this case, is when three prerequisites coexist:
- you are ready to sell your business;
- your business is ready to be sold;
- the market situation is favorable for sale.
The key advice regarding the timing of selling a business is this: do not rush.
How to evaluate your company
By evaluating the company in the best possible way, you can succeed in wringing the best economic deal out of the negotiation for its sale.
Factors affecting the value
Both tangible and intangible assets contribute to determining the value of a company. The former include, for example, company premises and machinery owned by the company. Intangible assets, on the other hand, are the know-how acquired over time, the customer base, its positioning within the market, and its reputation.
There are also other external factors that influence a company’s value: among them are the prospects of the market sector in which the company operates.
Evaluation calculation: what to consider
To help you calculate the value of your business, a rough estimate can be useful: to get an idea of how much the business is worth you can multiply the annual profit by 3. As mentioned, however, there are several aspects to consider in order to arrive at a more precise estimate: among the market conditions, remember to also consider the regulations that govern the industry.
Preparing for the sale
We’ve said it before: to sell your business successfully, you must be prepared to do so. Preparing to sell your business means, first of all, deciding whether to handle the negotiation yourself or rely on an intermediary. The “preparatory” activities-you should know this-are many.
Organization of documents and contracts
To sell your company you will need to put some relevant information in black and white, such as the company’s financial history. Then in the documents to be provided to prospective buyers are the certificates and licenses held by the company.
The contract of sale should be as detailed as possible: among the various pieces of information you should note, do not forget to list all the activities included in the transfer.
Due diligence: what to expect
Due diligence is a key step in the process of selling a business: a figure provided in 2020 by Benchmark International reports that half of all negotiations for the transfer of a business fail precisely because this step is not passed.
But what is due diligence? In the context of business transactions, it is that step that precedes the conclusion of the contract and consists of the analysis of the documents of a business, aimed at enabling the possible buyer to make a more complete judgment on the feasibility of the transaction.
We have a suggestion for you: as a seller, before granting access to your company’s data, ask potential buyers to sign a non-disclosure agreement.
Another piece of advice: don’t think you can hide any negative information. You must be ready to answer every question of your interlocutors, even the most insidious ones, with full transparency.
Finding a buyer
Identifying the right buyer is one of the most difficult steps in the process leading to the sale of the company.
Where and how to look for potential buyers
Potential business buyers fall into three macrocategories:
- private investors, that is, (precisely) private individuals who invest money, skills and time in the company by taking a management role or occupying a seat on the board of directors;
- financial investors, i.e., investors (these include private equity firms) who aim to earn continuous dividend income or who aim to resell the company after a few years thereby making a profit;
- strategic investors, that is, companies in the same industry seeking synergies or easy access to markets, customers or technologies through mergers.
In the first case (private investors), the company retains its autonomy and the seller can be involved in the transition period. Even in the case of a sale of the company to financial investors, at least at first, the company retains its autonomy. Different, however, is the case of a takeover by strategic investors: the acquired company is integrated, with different gradualness depending on the case, into the pre-existing business.
You can use a variety of sources to compile your list of potential buyers, starting with your network of contacts or that of your bank. Enlisting the help of a broker is another option available to you.
The role of intermediaries in corporate sales
Obtaining the contacts of possible buyers may not be easy, and the search for those potentially interested in buying must be conducted in a certain way, appropriate to the goal to be achieved and the target audience. To avoid wasting time and money, as mentioned, you can use the help of an intermediary, a figure who can guide you through the process of finding and selecting potential buyers.
Even if you should opt to turn to a broker-be careful, however-remember that you will still have to handle the sale yourself. Indeed, no one knows the company better than you do and can figure out who might be the ideal buyer for it.
Negotiating the sale
Establishing the minimum price you are willing to accept to divest your business will help you negotiate its sale more effectively. There is another tip: Gather as much information as possible about the possible buyer.
How to deal with potential buyers
When negotiating the sale of your company-we repeat-you must be absolutely honest about every aspect, financial and otherwise, of your company. Once you have identified the most promising candidates, you can invite them to take part in a cognitive interview at your company and arrange a guided tour of the premises. Image is key, and in this regard, there is another piece of advice for you: don’t be in a hurry to sell because, if you show desperation and no plan b, no buyer will offer the right price.
The key elements of a good deal
The figure identified to complete the sale of the company is only one of the key elements of the agreement. During the negotiation, it is also necessary to reach an agreement on the method of payment and to put in black and white all the activities that will be divested. A particularly sensitive issue concerns the management of the staff working in the company: what will be the fate of your employees?
Managing post-sales profits
The transfer of a business does not end with the handshake and the signing of the contract-that is why you must also know well how to handle the profits associated with it.
Financial planning after divestment
Again, as with the sale of the business, it is crucial not to rush. The best advice we have for you is to take as much time as you need to consider how to use the proceeds of the sale.
Reinvesting income: options and tips
Spending the entire amount obtained from the sale of the company is not a wise decision: certainly more appropriate is to reinvest all or part of the money. Very important for this purpose is to set some financial goals and plan each operation. Keep in mind that the scenarios that the sale of a business can open up are different: among the various options is, for example, the consolidation of a debt or, as already mentioned, retirement.
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